Journal of Comparative Economics | 2019
Chinese competition and product variety of Indian firms
Abstract
Using detailed firm-product-year data across manufacturing industries in India, and exploiting the exogenous nature of China s entry into the WTO in 2001, we investigate the link between the impact of import penetration from China on the product variety of Indian manufacturing firms. We find: (i) robust and significant effect of product drop, with the effect coming only from competitive pressure in the domestic market; (ii) evidence of product drop or creative destruction is robust only for the lower-half of the size distribution; (iii) firms drop their peripheral/marginal products and concentrate on the core ones; and (iv) our result is most strong for firms producing intermediate goods. For an average Indian manufacturing firm, 10 percentage point increase in India s Chinese share of imports in the domestic market reduces the product scope of firms by 1.7-4.4%. In contrast, we find positive effects on product scope as when firms are importing intermediate goods. We also find evidence of significant productivity effects and within-firm factor reallocation. Our results are consistent to a battery of robustness checks and IV estimation.